S4-18: How Do Roth IRAs Work, Pensions & ESG Investing

Meghan addressed questions submitted by her followers, including one about the reason behind private equity investments into accounting firms. Meghan explained that the high valuation of the stock market and high-interest rates have resulted in private equity firms, which raised funds pre-pandemic, sitting on a lot of cash. They look to put it to work where there are attractive growth opportunities.

Meghan discussed the potential reasons behind the increased interest of private equity firms in investing in accounting firms. She suggested that the expansion of the government and the growth of regulatory compliance have created opportunities for these firms. She also noted that many senior accounting professionals are nearing retirement, which could lead to a shortage of capital if they cash out their shares. Meghan proposed that private equity investment could help these firms hire more junior talent to meet the growing demand for their services. She clarified that this trend is not widespread, but it makes sense given the market conditions.

Meghan discussed the decision of whether to stay in a job with a pension or to switch to a higher salary elsewhere. She explained that pensions leave the burden and risk of retirement savings with a company and that companies paying pensions often provide lower salaries to compensate for this. She suggested that the decision should be based on factors such as the salary difference, the number of years until retirement, the amount that can be saved and invested, and the level of risk comfort. Meghan also mentioned that she would provide a post on retirement accounts and a retirement calculator on her social media profiles to help people make this decision.

Resources: How to Choose the Best Investment Accounts for Beginners

Retirement Calculator: How Much Money Should I Save for Retirement

Meghan discussed the possibility of switching an advisor in a Roth IRA to one that you self-direct. She indicated that removing the advisor and fees associated with it would depend on how the account was initially set up. She explained that the process could involve a written termination, a notification period, and the opening of a new account to roll over assets.

Meghan suggested that the first step would be to reach out to the fund administrator to ask about the advisory fees and how to remove them. She emphasized that these advisory fees could have a significant impact on the retirement balance due to the compounding effect of the fees.

Meghan clarified the difference between a Roth and a traditional IRA. She explained that the choice isn't about age, but rather tax obligations and future outlook for taxes. In a Roth account, contributions are made on an after-tax basis today, and no taxes are paid on the money or its gains later. In contrast, a traditional account involves contributions on a pre-tax basis, reducing the current year's taxable income. However, when funds are withdrawn in retirement, they're taxed at the then-current ordinary income rate.

Meghan suggested that many people prefer paying taxes at a potentially lower rate today than at a higher rate expected in the future, which is why they choose to contribute to a Roth account.

Meghan discussed the topic of sustainable investing and how it might transform the real estate and energy sectors in the upcoming decade. She highlighted the growing importance of environmental, social, and governance (ESG) investing, but noted that the hype has died down in recent times.

Meghan pointed out the lack of a solid set of agreed-upon metrics that make it easy for investors to hold companies accountable to their ESG goals as one of the biggest impediments. She emphasized the need for a standardized set of rules for ESG, similar to the generally accepted accounting principles (GAAP) that publicly traded companies use for financial reporting.

Meghan discussed the challenges facing Environmental, Social, and Governance (ESG) funds. Meghan pointed out that the underperformance of ESG funds in the 2022 down market, when the energy sector was the only sector with positive returns. She emphasized the importance of financial viability, accountability, and transparency in these initiatives. Meghan suggested that greater transparency, mandated rules, and reporting requirements could help establish ESG as a more widespread, enduring investment trend.

Meghan discussed the recent quarterly report on household credit, expressing concern over the rise in consumer debt balances and delinquency rates. She attributed this to the pace of spending outstripping income growth. Meghan also mentioned the importance of the upcoming week for corporate earnings, noting that over a hundred companies are reporting, including McDonald's, which had a significant miss. She also highlighted the discrepancy between the seasonally adjusted and unadjusted data in the job market and the need to monitor weekly unemployment claims.